Tired of high healthcare costs? 

If so, you’re not alone. Rising healthcare expenses frustrate small business owners and employees alike. Not taking advantage of tax savings and investment opportunities from HSAs could cost your business tens of thousands of dollars.

Whether you're a small business owner new to HSAs or already offering them through payroll as part of your benefits package, having this knowledge and tools can help you maximize these valuable financial tools.

Learn the essentials of HSAs with five key insights. Explore what HSAs are, how they work, and why they're vital for managing health insurance and healthcare expenses. 

How Does an HSA Plan Work?

First things first, what exactly is an HSA? We’ll dive into the details later in this post, but essentially, you can think of an HSA as a personal savings account dedicated to healthcare expenses. 

As an employer, you can offer HSAs as part of your employee benefits package. Employees can then contribute a portion of their salary to their HSA account up to the annual contribution limit set by the IRS. These contributions are made pretax, reducing the employee's taxable income–resulting in a higher net pay. 

Any funds deposited into the HSA can be invested, like a retirement account, allowing the account balance to grow over time. Employees can then use the funds in their HSA to pay for qualified medical expenses, such as doctor visits, prescription medications, and even certain medical equipment. 

Important Note: Unused funds in the HSA roll over from year to year, allowing employees to build up savings for future healthcare needs.

HSAs offer small businesses and their employees a valuable tool for managing healthcare expenses. By understanding what an HSA is and how it works with 125 Plans and more, you can harness its benefits to provide your employees with a tax-advantaged savings option for healthcare costs. 

What is an HSA? 

An HSA is a tax-advantaged account that allows individuals to set aside pretax dollars to pay for qualified medical expenses. HSAs are typically offered in conjunction with a high-deductible health insurance plan, and they provide a triple tax benefit: 

• Contributions are tax-deductible
• Growth is tax-free
• Withdrawals for qualified medical expenses are tax-free 

Related Read: Health Savings Account vs. Flexible Spending Account: What's the Difference?

These advantages make HSAs an attractive option for both employers and employees. They provide a way to save money on healthcare costs while also enjoying potential tax savings.

You should work with a local broker to set up your HSA, but here are the basic steps you should take to set up this solution for your employees:

1. Research and Understand HSA Requirements: Before setting up an HSA, make sure you understand the eligibility criteria and requirements and that both your business and employees have a high-deductible health plan to qualify.
2. Choose an HSA Provider: Choose a reputable HSA provider or financial institution that offers good fees, investment options, customer support, and user-friendly online platforms.
3. Communicate with Employees: Educate your employees about HSAs and the benefits they offer. Provide clear information about how HSAs work, the tax advantages, contribution limits, and the potential for investment growth.
4. Set Up Payroll Deductions: Talk to your payroll provider or HR department, especially If you plan to contribute to your HSA regularly. They can help you set up payroll deductions and arrange for them to be deducted from your paycheck.
5. Educate Employees on HSA Usage: Offer educational resources to help employees use HSAs effectively. Explain eligible expenses, reimbursement procedures, and record-keeping. 
6. Perform Ongoing Administration: Continuously monitor and manage the HSA program. Stay updated on any changes in HSA regulations and adjust your processes accordingly. Regularly communicate with employees to answer their questions.

How an HSA Plan Works: The Basics 

As mentioned above, funds from an HSA are not subject to federal income tax (FICA) or the federal unemployment tax (FUTA.) Employers, employees, or both can contribute to an HSA up to the annual contribution limit set by the IRS each year.

Employees have great flexibility regarding using these funds as long as they are used to pay for qualified medical expenses. These expenses include a wide range of healthcare-related costs, such as doctor's visits, prescription medications, dental care, vision expenses, and even certain over-the-counter items. 

HSAs can also cover expenses for spouses and dependents, making it a comprehensive solution for managing healthcare costs for the entire family.

Employees can use a dedicated HSA debit card to access their HSA funds. They can also pay out-of-pocket for qualified expenses and later reimburse themselves from their HSA account. It's important to keep receipts and documentation to support the eligibility of expenses for tax purposes.

Additionally, HSAs often offer investment options to allow funds to grow over time. Employees can choose to invest their HSA contributions in various investment vehicles such as mutual funds, stocks, or bonds. This option enables their HSA to grow through investment returns, providing an opportunity for long-term accumulation.

Eligibility and Contributions to an HSA

Understanding who is eligible to contribute to a Health Savings Account (HSA) is crucial for both employers and employees. Here are the key eligibility criteria and contribution guidelines you need to know:

Eligibility Criteria:

To be eligible for an HSA, your employee must meet the following criteria: 

• Enrollment in an HSA-Eligible Health Plan: To contribute to an HSA, individuals must be enrolled in a high-deductible health plan (HDHP) that meets the IRS requirements for HSA eligibility. This means the health plan must have a minimum deductible and maximum out-of-pocket limits set by the IRS.
• Not Enrolled in Certain Other Plans: Individuals cannot contribute to an HSA if they are enrolled in a health plan that is not HSA-eligible, such as a traditional health insurance plan with lower deductibles.
• Not Enrolled in Medicare: Once individuals enroll in Medicare, they are no longer eligible to contribute to an HSA. It's important to understand the timing of Medicare enrollment and its impact on HSA contributions.
• Not Claimed as a Dependent: Individuals who can be claimed as a dependent on someone else's tax return are generally not eligible to contribute to an HSA.
  
  

Contribution Guidelines:

• Contribution Limits: The IRS sets annual contribution limits for HSAs, which can vary based on whether the HSA is for an individual or a family. It's important to stay updated on these limits to ensure compliance.
• Employer Contributions: Employers can contribute to employees' HSAs, and these contributions are typically made through pretax payroll deductions. Employers may also offer matching contributions, similar to a 401(k) match, to incentivize employee participation.
• Individual Contributions: Employees can also make individual contributions to their HSAs, either through pretax payroll deductions or with after-tax dollars. Pretax contributions reduce taxable income, leading to potential tax savings.

By understanding these eligibility criteria and contribution guidelines, employers and employees can make informed decisions about offering and contributing to HSAs. 

5 Things You Need to Know About HSAs 

If you’re wondering, "How does an HSA plan work?” Here are five things you should know.

1. Cost Savings 

One of the most significant advantages of offering an HSA is the potential for cost savings for you and your employees! 

Since employees are responsible for a higher deductible under a high-deductible health plan (HDHP), monthly premiums for the business tend to be lower. This cost-sharing arrangement can help companies to save on healthcare expenses while providing employees access to necessary medical services. 

On the other hand, employees can save money through the pretax savings of their HSA funds, making this solution a win-win. 

2. Tax Savings 

As briefly mentioned, tax savings are one of the key benefits of an HSA. Employees contributing to their HSAs through pretax payroll deductions reduce their taxable income. 

Reduced taxable income for your employees results in payroll tax savings for employees and employers. The contributions made to HSAs are tax-deductible, and the interest or investment gains within the HSA grow tax-free. 

Related Read: Are Payroll Taxes Deductible? 3 Top Things You Need to Know

These tax advantages can provide significant savings and incentives for employees to actively contribute to their HSAs.

3. Employee Control 

HSAs empower employees by giving them more control over their healthcare expenses. With an HSA, employees can decide how they utilize their funds and where they allocate their healthcare dollars. 

This control fosters a sense of ownership and responsibility for their health and well-being. By giving employees greater control, businesses can contribute to a better benefits experience and overall employee satisfaction.

4. Employee Wellness 

What employer doesn’t want their employees to be healthier and more productive? An HSA can result in just that for your business! 

Implementing HSAs can contribute to a culture of wellness and financial responsibility. Encouraging employees to actively manage their healthcare expenses and make informed decisions promotes a proactive approach to health and wellness. 

This approach can result in better employee health outcomes, increased productivity, and improved team efficiency. HSAs align with the growing focus on holistic employee well-being, addressing both physical and financial health.

5. Attract and Retain Employees 

Lastly, offering an HSA as part of your benefits package can be a valuable tool for attracting and retaining talented employees. 

HSAs have become increasingly popular among job seekers. Modern job seekers value the flexibility, tax advantages, and control that HSAs provide. Including an HSA as part of your benefits offering can set your business apart from competitors and be an appealing incentive for current and potential employees. 

Offering an HSA to your employees demonstrates your commitment to employee financial wellness and positions your business as an employer of choice in the competitive job market.

Potential Drawbacks of an HSA 

While HSAs offer your business many advantages, no solution is perfect! As a result, you need to be aware of potential drawbacks. One potential drawback is the possibility of incurring penalties and fees. 

If HSA funds are used for non-qualified expenses before the account holder turns 65, they may be subject to penalties and taxes. Understanding the IRS guidelines for qualified expenses is essential to avoid any unintended financial consequences.

Additionally, some HSAs may come with additional fees. These fees can include monthly maintenance fees, per-check charges, or fees for using an ATM to withdraw funds. It's crucial for individuals to carefully review the terms and conditions of the HSA provider to understand the potential fees involved. 

Pro-Tip: Comparing different HSA options and providers can help mitigate the impact of these potential drawbacks and find a solution that best suits individual needs.

How Does an HSA Plan Work? Connect With an Expert To Better Understand 

This post should provide you with the information you need to start offering HSAs to your workforce. However, for the best results, you may want to partner with an expert in the field who truly understands the ins and outs of HSAs!

We don’t offer Section 125 plans or health insurance here at ConnectPay, but we can help you find trusted, local brokers to explore your HSA options. Or if you’ve already got a Section 125 Plan but need a Plan Document–we can help too! Our new product Connect Section 125 is an affordable vehicle to master Section 125 Plan Document compliance for your small business! Our portal and its tools can help you manage Section 125 compliance all year long.